Archive for the ‘2015 year-end tax tips’ Category

Beat the clock gifts. The hours of 2015 dwindle to a precious few, but there is still time to get some important things right in your tax planning, many of which we have covered in our2015 year-end planning tips series.Today’s tip is for those who would like to make a small gift to an outfit that has made the world a little better this year. These are organizations I support.

Institute for Justice, the public-interest law firm that stands up for the little guy against big government and crony capitalists. It was IJ attorneys who recovered the life savings confiscated from the Northwest Iowa restaurant owner from the IRS, and who won the fight against the IRS preparer regulation power grab. Donate here.

Salvation Army. They work tirelessly to help the down and out in the inner city, and when disaster strikes, they are quietly on the ground providing food and shelter while the politicians are busy showing their concern for the cameras. Donate here.

Tax Foundation. The good people at the Tax Foundation are a doughty little brigade fighting the battle for good tax policy against the armies of lobbyists and politicians who do everything possible to screw things up even more. Donate here.

Scott Greenberg, Regarding the “Private Tax System” of the Wealthy (Tax Policy Blog). “The most important reason why the 400 highest-income taxpayers pay an income tax rate of 17 percent is not a loophole; it is the lower rate on long-term capital gains and qualified dividends (20 percent in 2012, 23.8 percent since 2013).” Like I said yesterday, but with more and better explanation.

Happy New Year, everyone! Thanks for reading in 2015, and best wishes for 2016 for you and for all my tax fellow bloggers, few of whom I’ve met, but who all make every day of writing the Tax Update enjoyable and rewarding.

Things that have to be paid for by the end of the day tomorrow. The unforgiving calendar is nearly ready to turn, and that leaves only today and tomorrow to do some things to help lower 2015 taxes. Some expenses are only deductible if they are paid by the deadline.

For cash basis business taxpayers, payment needs to be made for most business expenses by the end of the day tomorrow. “Payment” means the check is written and postmarked, or a wire transfer is completed, or a legitimate liability has been incurred. If it’s on the credit card by the end of the day tomorrow, it’s considered paid for.

The only business expenses that normally can be paid and deducted after year-end for cash-basis taxpayers are pension and profit-sharing contributions. these are deductible this year if paid by the due date of the 2015 tax return, including any extensions.

For accrual-basis taxpayers, any expenses owed related parties are deductible only if paid by the end of the day tomorrow (Section 267). For C corporations, this generally includes expenses owed to 50% owners and their family members, and to corporations and partnerships owned by 50% owners. For S corporations and partnerships, any ownership at all makes you “related,” and the definition of “family” goes beyond ancestors, descendants and siblings to include aunts, uncles, nephews and nieces.. These rules can get complicated, so be sure to pay by tomorrow or consult your tax advisor if you aren’t sure.

Gifts are a different story. It’s not enough to mail a check by tomorrow to count as a 2015 gift; the check actually must be cashed. If you are trying to get an annual exclusion gift under the wire by tomorrow, consider a wire transfer or a cashiers check.

Charitable contributions can deducted this year if mailed this year, but be sure to get a certified mail postmark if it’s a big one — or better yet, use a credit card. If you are making a gift of appreciated stock, it has to be in the charity’s brokerage account by the end of the day tomorrow to count.

Finally, if you are spending money on depreciable property, even if you plan to use the Section 179 deduction, it’s not enough to buy and pay for the property by tomorrow. It must be “placed in service.” That means on-site, ready to go, not at the dealership or in crates on the dock.

This shows that those 400 people are really putting one over on the IRS with their clever planning, doesn’t it? Well, not really. I’ll superimpose the top capital gains rates that applied for the years on the chart (sourced here):

Funny how that income tax rates of those sneaky 400 people correspond with the top capital gain rates. Why would that be — because those dastardly 400 rich people conspire to incur capital gains?

You also may notice that the New York Times cuts off the chart conveniently right before two big increases in the capital gain rate — the 2013 expiration of the Bush 15% capital gain rates and the 2013 effective date of the 3.8% net investment income tax. You can bet that the line goes right back up starting in 2013.

On Wednesday, the Internal Revenue Service published an update to its annual assessment of how much the 400 highest-earning Americans pay in taxes. It showed that the effective tax rate paid by those Americans jumped in 2013 to nearly 23 percent.

Gee, amazing how that works! I’ve updated the chart to show the new number.

Correction: this post originally stated in error that the Net Investment Income Tax took effect in 2014, instead of 2013.

Donors listing the IRS as their employer have donated roughly $453,800 to Democratic candidates and causes and $221,400 to Republican candidates and causes since 1990. About one in four of the dollars for Democrats, or roughly $117,500, went to President Barack Obama.

But IRS employees since 1990 have also donated $203,000 to the National Treasury Employees Union, which in turn has given about 95 percent of its $6 million in political contributions to Democrats over the last 25 years, OpenSecrets.org data shows.

Yet we are asked to believe the IRS operates in a fair and neutral manner towards all political persuasions.

Basis or bust. With the re-enactment of bonus depreciation for 2015, some S corporations find themselves with taxable losses for 2015. That won’t do much for the 2015 tax returns of S corporation shareholders who have no basis in their stock at year-end. While they also have to get by the “at-risk” and “passive loss” limits, they don’t even get to those problems without basis.

A taxpayer’s initial basis in an S corporation is the amount paid for the stock. It is increased by capital contributions and by undistributed income of the S corporation. It is reduced by distributions of S corporation earnings and by S corporation losses. If there have been 2015 distributions, they count before the losses do.

A shareholder with no stock basis can still get deductions by loaning money to the S corporation by year-end. The loan has to meet the at-risk rules (it can’t be funded by another shareholder or by the corporation, for example), but if it meets those requirements, it can create basis for S corporation losses. But don’t do anything hokey like making a loan on December 31 and having the corporation repay it on January 3.

IRS delays due dates for 1095-B and 1095-C reporting. 2015 is the first year many employers are required to file a new form documenting insurance coverage, or offers of coverage, for their employees. Apparently many employers are still scrambling to figure out how to comply with the complex rules, because yesterday the IRS announced (Notice 2016-4) a delay in the deadlines for providing these forms to employees and to the IRS. A summary:

Employers are encouraged to file under the old deadlines if they can, but they now have a blanket extension, with no need to file any extension request.

While the IRS will be processing forms starting January 16, this announcement tells us that millions of taxpayers will lack the forms they need to properly report their ACA tax credits or penalties for inadequate coverage. The IRS says that employees can rely upon “other information received” from employers or insurers, and do not have to amend returns if the 1095s they receive later show that their original amounts are incorrect. What could possibly go wrong with this? Aside from rampant errors and outright fraud, I mean.

We are now approaching six years since the enactment of the ACA, and it’s still a mess.

Stephen Entin, Disentangling CAP Arguments against Tax Cuts for Capital Formation: Part 4 (Tax Policy Blog). “Most major tax bills of the last thirty years have provided serious tax reductions or refundable credits (resulting in negative taxes) for lower income families. These are extraordinarily expensive, but do next to nothing to promote capital formation to raise productivity, wages, and employment.”

The corn’s in, but the harvest isn’t over. The tax law taxes capital gains for almost all individual taxpayers when you sell an appreciated asset, even though it shouldn’t. Still, if you’re like most of us, not everything you buy goes up.

The tax law allows individuals to deduct capital losses when they cash out a money-losing investment, up to the amount of capital gains plus $3,000. That means paying capital gain taxes is optional to the extent you have unrealized capital losses in your taxable portfolio. That’s a silly option to exercise. Here are some thoughts on loss harvesting:

– You have to take the loss in a taxable account. A loss in an IRA or 401(k) plan doesn’t help you.

– Normally the “trade date” is the effective date for tax purposes, so you can sell a stock as late as December 31 this year and still deduct the loss on your 2015 1040.

– If you have a loss on a short sale, the tax law treats it as closing on the settlement date, not the trade date, so you can’t wait until the last minute to close a short sale to get a deduction. (See also Russ Fox, Harvesting Capital Losses: Act Quickly on Shorts!)

– You don’t need to overdo it. You can deduct your capital losses only to the extent of your capital gains, plus $3000. But if you do overdo it, individual capital losses carry forward indefinitely.

– Long-term losses can offset short-term gains, and vice-versa.

– Harvesting losses helps taxpayers subject to the Obamacare/ACA Net Investment Income Tax to the extent it helps for regular taxes.

Grinnell once housed Spaulding Manufacturing Company, one of many small early Midwest automakers. The Spaulding story is told in my college buddy Curt McConnell’s fine book, Great Cars of the Great Plains.

There is only one known surviving Spaulding vehicle. It was to be a crown jewel of a transportation museum to be built around the dilapidated remains of the old Spaulding plant. But it hasn’t gone well, according to the Register:

Three years after it opened, the Iowa Transportation Museum has hit a dead end, losing its building to foreclosure and leaving the city of Grinnell on the hook to repay more than $4 million in federal aid for the project.

The museum, which had operated in a renovated portion of the old Spaulding manufacturing plant in downtown Grinnell, closed in October, unable to pay its mortgage to Iowa City’s MidWestOne Bank. The bank even took possession of the museum’s crown jewel, a rare 1913 Spaulding automobile built at the Grinnell plant.

It sounds as though the business plan of attracting auto tourists to Grinnell was hopelessly optimistic, but it was tax credit failure that finished things off:

The museum built its budget around receiving $900,000 in federal historic tax credits that never arrived. A 2012 federal appeals court ruling about a real estate project in New Jersey shook up the market for historic tax credits. A subsequent IRS memo explaining the ruling said, essentially, that investors should not stand to profit from historic tax credits without shouldering some of the risk. As a result, investors backed away from historic tax credit projects.

“That is where things really started to come apart on us, and it was just kind of a chain reaction from there,” Brooke said.

This is where I find myself puzzled. By their terms, federal historic rehab credits have never been transferable. A transferable tax credit can be sold by the original recipient to cash in on a tax break too big to use by itself. Tax credit middlemen tried to make them transferable by setting up “partnership” structures where investors were nominal partners, but really were in it only for the tax credits, with economic gains and losses from the rehab project allocated elsewhere.

To my surprise, the Tax Court had gone along with that structure, but the Third Circuit Court of Appeals reversed them in Historic Boardwalk Hall LLC (CA-3, No. 11-1832). The court held that because the tax credit investor didn’t share meaningfully in either potential income or loss from the project, it wasn’t a partner eligible for tax credits.

That was the risk I had always seen in these deals, and it came home to Grinnell.

The Moral? When it takes tax credits to make a deal work, it doesn’t really work. It’s just crony capitalism.

Enjoying a short Des Moines winter commute.

Robert D. Flach has started a new organization, TAX PROFESSIONALS FOR TAX REFORM. “We believe that the one and only purpose of the Tax Code is to raise the money necessary to fund the government.” A worthy cause.

Paul Neiffer, Farm and Ranch Provided Housing. A partnership, sole proprietor or S corporation cannot provide and deduct employee related housing for any of its owners (unless they own less than 2% AND are not related to any other owners).”

Tax Policy Blog, Apple CEO Tim Cook: We Need a Tax Code for the Digital Age. “The solution to ‘profit shifting’ is not a new patch to an already complicated tax code. The solution that the U.S. needs is a comprehensive tax reform that reduces both the corporate tax rate and the complexity of the entire tax code.”

TaxProf, The IRS Scandal, Day 961, Day 962, Day 963. The Day 961 post notes the obvious problems of giving one of the most aggressively secretive agencies power over passports. Day 962 inadvertently confirms one of the driving forces of the IRS scandal — ongoing bitterness over the Citizens United decision preventing bureaucrats from selectively restricting free speech rights.

Today is the 63rd anniversary of my parents’ wedding, so today’s post goes up in their honor.

Love is a many-splendored thing, but love is even better when it saves taxes. Your marital status at year-end is your filing status for the entire year, so maybe you want to run down to the courthouse and tie the knot before the ball drops before midnight January 1, local time. Sure, call me a hopeless romantic. The Tax Update just rolls that way.

A quick trip to the preacher may be in order in the following circumstances — assuming, of course, you have sufficient non-tax reasons to get married:

– One prospective spouse has a big capital gain, and the other has capital losses that would otherwise go unused.

– One of you has passive income, the other has passive losses. If you are married on the last day of the year, the losses can offset the income on a joint return.

– One of you has substantial income in 2013, and the other doesn’t. If you have only one income between the two of you, you’ll save taxes on a joint return because of the wider tax brackets on a joint filing.

– If you are Iowans, and one of you has pension income, marriage will enable you to exclude up to $12,000 from your Iowa income tax return. A single filer can only exclude $6,000.

– One of you has AGI over $200,000 and investment income, and the other has AGI under $50,000. A quick wedding gets the higher-earning spouse out of the new Obamacare Net Investment Income Tax.

There are other special circumstances that could lead you to tie the knot. A good tax marriage results when one partner has tax attributes, like capital losses, that can be used on a joint return but would not be useful on a single return. Other such items could include tax credit carryforwards and investment interest carryforwards.

‘Til death do us part, but you first! For the wealthy single taxpayer,the estate tax can also offer a more macabre tax planning opportunity. By marrying and surviving a poor spouse, the rich spouse can pick up an extra $5.4 million in estate tax exemption. That’s because a widowed spouse can now inherit the short-lived spouse’s unused exemption.

Of course these things apply to couples pondering divorce, too, but that’s too sad to dwell on this time of year. Oops, I just did. And some couples, particularly those where both have good incomes, are better off postponing marriage, or (shudder) accelerating divorce.

Anyway, you should marry for the right reasons. But if you can both be in love and cut your taxes, why not let IRS help pay for your honeymoon?

As the holiday giving frenzy morphs into the holiday return frenzy, many tax-wise folks are still thinking of giving. Taxpayers with enough net worth to worry about paying estate tax are considering their annual gifts to family (the estate tax kicks in for estates starting at $5.43 million in 2015). For such taxpayers, the basic tool is the $14,000 per-donor, per-donee gift tax exclusion. A couple with four kids maximizing annual giving can reduce their taxable estates by $560,000 over five years, not even counting appreciation of the gift.

Taxpayers often ignore the opportunities for annual giving, thinking “the annual exclusion will be there for me next year.” While true, that’s the 2016 exclusion. But then the 2015 opportunity is lost forever – for our hypothetical four-child couple, it’s a $560,000 tax-saving move lost.

If it’s worth doing, it’s worth doing right. To get the gift to count in 2015, here are some tips:

– If you’re writing a check, march the lucky recipient down to the bank to cash it by December 31. Checks not cashed by year-end normally won’t count as 2015 gifts.

– If you are donating private company stock, make sure the corporate secretary records the transfer on the company’s books by year-end. Also make sure the tax returns reflect the gift – if you make a December 28 gift of S corporation stock, make sure the donee gets a K-1 showing income for the 12/28 through 12/31 period.

– If you are donating public company stock, make sure it’s in the donee’s brokerage account before the end of the day December 31.

Personal gifts are neither deductible to the donor nor taxable to the recipient. For non-cash gifts, the recipient steps into the donors basis for a future sale if the property has appreciated. If the value at the date of gift is less than the basis, the recipients basis for determining loss only is the date of gift value.

Plan on filing a gift tax return for any property gifts, even if you owe not gift tax; a properly prepared gift tax return starts the three-year statute of limitations, preventing any future IRS quibbling over the values.

If you’re in a generous mood on Christmas Eve but want more out of your charitable gift than a straight-up deduction, consider a gift to an Iowa Student Tuition Organization. A gift to an STO yields a 65% non-refundable Iowa tax credit, in addition to the federal charitable deduction. You don’t get an Iowa charitable deduction, but that trades an 8.9-cent benefit for a 65-cent tax benefit, so that works.

The credit is capped annually, though, so some STOs may have already used up their 2015 credits, and you would have to wait until 2016 to get one. Eligible donors get a certificate with a unique identification number that they use when they claim the credit.

Programming note: The Tax Update is taking it easy the rest of this week. Tax Roundups resume Monday, but check back every day the rest of the year for another installment of our 2015 year-end planning tips series.

10 days to get a qualified plan in place. Some of the best deductions for sole proprietors and one-owner corporations are found in the tax law’s “qualified plan” rules. A payment to a qualified pension or profit-sharing plan is deductible now, grows tax free, and is only taxable on retirement. For one-employee companies, it’s a deduction for taking money from one pocket and putting it in another.

One of the best of these opportunities is the “Solo 401(k),” which allows a deduction of up to $53,000 for contributions to a solo owner-employee’s retirement plan. But there’s one little catch: the plan has to be in place by December 31 of this year to allow a 2015 deduction.

If that sort of deduction sounds attractive, you should consult a qualified plan professional. Some brokerage houses can steer you the right way, as can the Vanguard mutual fund company.

Remember, though, that once money is in a qualified plan, expect it to stay there. Early withdrawals face a 10% penalty, as well as income tax liability. 401(k) plans generally can’t be investors in or lenders to the plan owner’s business. There are annual compliance costs that inevitably reduce the tax benefits. Still, for an annual deduction that size, some inconvenience can be tolerated.

Kay Bell, Upcoming filing season will start on time: Jan. 19, 2016. Almost none of my clients are ready by then. While I’m glad that the season isn’t delayed by a failure to pass an extender bill, I think identity theft requires a later start to issuing tax refunds. They shouldn’t be processed until W-2 and 1099 information is in the IRS system – preferably with special W-2 codes like those the IRS is experimenting with this season to catch fraudulent claims.

Of course, that means the government will sit on overpayments longer. That should be addressed by changing the “I got a big refund!” culture. That could be done by lowering to 75% the amount of taxes that have to be paid in by April 15 to avoid a penalty and by changing the withholding tables to make refunds less likely.

Robert D. Flach comes through with a “meaty” Christmas Week Buzz, with lots of Extender bill discussion and a hint of perhaps the most unusual Christmas Eve tradition ever.

TaxProf, The IRS Scandal, Day 957. Today’s link goes to a Washington Post story that says “There is no love lost between Republicans in Congress and the Internal Revenue Service, whether it’s their dislike for the tax code, the current tax commissioner or their fury at the agency’s treatment a few years ago of conservative groups.” If you want to see increases in the IRS budget, you want Commissioner Koskinen to resign.

8. Tax credits for what ails you. Hillary Clinton has taken a page out of Bill Clinton’s fiscal playbook: Identify a kitchen table problem and propose a modest tax subsidy to relieve the pain. She has tax credits for families burdened by the high costs of education, caring for aging parents, and high medical costs. And she’s proposed another credit to encourage employers to give workers a stake in their companies. My TPC colleague Gene Steuerle has a name for this: tax deform.